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4 Reasons the Government Cannot Run the Economy

We continually see the relative failure of government actions to manipulate the economy to function at just the right, optimal level. There is a reason. Even if government was peopled by actual experts with a deep and wise understanding of economics, such actions would remain doomed to failure.

It’s not that an economy as powerful as the United States’ cannot endure government meddling for some period. But the meddling inevitably is harmful and hamstrings the economy. Conversely, it does allow politicians and government officials to posture for voters, which, mixed with well-intentioned ignorance, is the point of the action.

Here are four reasons why such interventions are doomed to fail.

1) Top down is not how economies operate

The government approaches the economy from the top down, considering it a contained engine that just needs to cool off, heat up, be stimulated, etc. This totally misunderstands an economy anywhere, but particularly in a quasi free-market economy. In this type of economy, but in all economies to a degree, decisions are made by millions of people. In the interconnected global economy, by billions of people.

Millions of people making individual decisions in unpredictable ways is not how an engine works. Engines are defined and explained. Millions of individual decisions are like micro organisms that result in the creation of ever changing markets and economies.

2) The inevitability of cycles

Economies will always cycle. Allowing self-correction is what would happen if it was understood that millions of people are making decisions and politicians were primarily interested in what is best for the most. Alas, self-correction is verboten!

Instead we get constant interference from centralized planning agencies in Washington, D.C., or Brussels, Belgium. Rather than the free market elevating what people want and dumping what people do not want so resources are allocated accordingly and efficiently — a process called “creative destruction” — government involves itself and makes the situation worse.

3) Bubbles and troubles

Bubbles are good and natural. Well, the natural ones are good. Bubbles happen organically in industries where there is creative destruction going on. New technology spawns a lot of competing companies, but only the best survive and thrive and the weaker are dumped. This is determined by millions of consumers’ decisions, not by government. Computers and smartphones are examples of how this worked fairly naturally, and the economy’s resources went to Apple and Samsung and away from Nokia and Motorola.

Some bubbles are government created. The real estate bubble that popped in 2007 happened when the government created laws requiring banks to lend to people who could not afford a mortgage so they would have the opportunity own a house. Great politics. Terrible policy. Naturally this generated a huge bubble in housing prices because of all the increased demand. When the economy cycled down, many of those people who should not have received a mortgage in the first place defaulted and we saw a downward spiral effect in which nearly everyone was hurt.

But there was a predictable compounding effect as government interfered further to fix what it had broke. After the housing bust, politicians such as George W. Bush and on a greater scale, Barack Obama, instituted more and more policies that made things worse and worse. Each step laid the groundwork for less market freedom, meaning less individual freedom, and consequently more government interference and control. The result was a historically long recession now called the Great Recession — mimicking in name, dynamics and causation the Great Depression.

4) Mixing in conflicting goals

Government works at odds with itself when trying to keep the economy humming — another engine metaphor. It is constantly issuing hundreds and thousands of new rules that businesses must learn and live under. These usually use up some resources that could be better deployed, and the actions ends up dampening the economy. They also consistently collide with the law of unintended consequences.

Minimum wage laws are an example of hurting those people they are intended to help. The Affordable Care Act, or Obamacare, is another example as costs have skyrocketed and the system is crumbling. And bringing this around, the Dodd-Frank financial reform act that was aimed at avoiding the financial fall-out of another real estate bubble and bailing out banks has had the perverse effect of creating even larger banks — banks too big to fail.

Government cannot run an economy because no one can. The economy that most prospers everyone is one in which individuals have maximum freedom in their consumer choices and in starting and running businesses. The economy the government runs most benefits those in government.